Shareholders Are Unhappy with Fast Food Pay

Last Thursday, while fast food workers walked out on strike across the US and around the world, another group of stakeholders in the industry was making a similarly direct statement about the way these companies do business. At Chipotle’s annual shareholders’ meeting, owners of 77 percent of the company’s public stock voted against an executive compensation package that would pay almost $50 million to Chipotle’s CEOs for a single year of work. The two groups are evaluating pay on opposite ends of the income spectrum but drawing the same conclusions: human capital management at the largest fast food firms is increasingly problematic for workers, owners, and the economy.

Fast food workers, like the burrito-making maestros at Chipotle, are the lowest paid occupation in the entire workforce. Chipotle’s CEOs, in contrast, are at the very top of the pay scale—even when compared to other executives. In my recent paper, Fast Food Failure: How CEO-to-Worker Pay Disparity Undermines the Industry and the Overall Economy, I showed that the underinvestment in front-line workers and rising pay at the top makes pay disparity in the fast food industry an extreme outlier, even in an economy where inequality is growing overall. In 2013, the CEO-to-worker compensation ratio for the fast food industry was more than 1000-to-1. That extraordinary disparity strains firm performance and creates risk for investors, with negative consequences for stakeholders across the economy.

Chipotle’s shareholders took issue not only with the scale of “egregious pay practices” (as characterized by NYC Comptroller Scott Stringer), but also with their composition. In a binding vote, shareholders vetoed a plan to issue 2.6 million new shares to the executives as part of their “incentive” awards. Firms issue equity awards to top executives in an attempt to align the interests of managers with those of shareholders, but poorly crafted policies can actually produce the opposite result by creating an incentive to meet short-term benchmarks at the expense of long-term value. At Chipotle the grants have not resulted in CEOs growing an equity stake in the company, but rather cashing in shares for huge payouts each year.

This could be a shareholder spring moment for fast food, where the heightened scrutiny of executive compensation is not limited to Chipotle. At the Domino’s Pizza annual shareholders’ meeting last month 24 percent of the company’s ownership voted against the executive pay proposal citing similar issues of scale and poorly targeted incentive pay.

The recent, synergetic, shareholder and worker activism reveals a new alliance of material interests between stakeholders in disparate companies, as lopsided human capital management generates volatility that starts in the sectors with greatest inequality but ripples economy-wide. The common interest in corporate governance will only strengthen over the next decade, as industries like fast food and retail add a large share of the new jobs in the labor market, intensifying the broader effects of income inequality like instability and slow growth.

As the main driver of inequality in the most disparate sector of the economy, the fast food industry is the right place to see such alliances emerge.